Bitcoin price rollercoaster: Don’t panic, crypto trading volumes just hit a TEN-month high
In the early hours of Monday morning, 24-hour cryptocurrency trading volumes hit $39 billion – the highest since 21st April 2018 when it hit $41 billion. But what does this mean?
The importance of liquidity
In traditional finance, liquidity is the most important aspect of trading on exchanges. If you want to trade an equity, bond or commodity on the open market (or indeed in the dark pools), you need confidence that you will be able to execute a trade immediately at the price listed. A lack of liquidity implies that there’s no market depth, and you won’t be able to buy and sell at the current advertised price. Investment banks often get paid to provide liquidity – so called “market making” activity.
In crypto, we have many hundreds of altcoins, and most have very thin liquidity. If I arbitrary pick number 500 on CoinMarketCap, an altcoin called “Diamond,” I can see its 24 hour trading volume is $1,916 on a market cap of $2.8m. On such tiny volumes, I don’t have much confidence in the price. However, conversely, if volumes are high then it means that the markets are functioning smoothly, as an investor I can be confident that the price is accurate and the price is less susceptible to manipulation.
Also, bear in mind that the primary aim of many cryptocurrencies is not one of trading or speculation, they wish to be a spendable currency, or as a mechanism of payment exchange, therefore reported volumes are indicative that they are actually being used.
Therefore, high trading volumes are a good thing. Today’s high of $39 billion in trading volume is around five times the $8 billion lows of the second half of 2018. In the long run, it should lead to lower volatility – but crypto being crypto, we’re still working on that.
High trading volumes are a sign that the crypto-winter is over
We see it time again, when there’s a pump on the price, there is a secondary drop as traders cash out. For instance, if the trader(s) locked in the $320 million Bitcoin Futures trade that was made last week, they could have made in the region of $20 million profit when Bitcoin went above $4,000 – but this would have created a massive drag on the price. Even record high trading volumes wouldn’t absorb a $320 million hedge in Bitcoin.
This temporary correction masks the fact that the 10-month high in trading volumes is a strong sign that the long crypto-winter is over, and signs of spring are in the air.
The post Bitcoin price rollercoaster: Don’t panic, crypto trading volumes just hit a TEN-month high appeared first on CryptoNewsReview.